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 Chapter 6

Pricing Fixed-Income Securities

Chapter Objectives

1. Introduce the mathematics of interest rates for fixed-income securities.

2. Demonstrate the impact of compounding.
3. Describe the relationship between the interest rate on a security and the security's market price.
4. Introduce the concept of duration as a measure of a security's price sensitivity to changing interest rates.
5. Explain how interest rates on different money market instruments are quoted.
6. Introduce total return analysis and its use in valuing investments.

Key Concepts

1. Interest rate mathematics are based on the simple recognition that cash in your possession today is worth more
than the same amount of cash to be received at any time in the future.

2. Simple interest is interest paid only on the initial principal. Compound interest is interest paid on the
outstanding principal plus any interest that has been previously earned, but not paid out.

3. Interest may be compounded over different intervals. The shorter is the interval, the greater is the compounding
frequency, and the greater is compound interest, ceteris paribus.

4. There are four basic price and interest rate relationships:

a. Market interest rates and bond prices vary inversely.
b. For a specific absolute change in interest rates, the proportionate increase in price when rates fall
exceeds the proportionate decrease in price when rates rise.
c. Long-term bonds change proportionately more in price than short-term bonds for a given change in
interest rates.
d. Low-coupon bonds change proportionately more in price than high-coupon bonds for a given change in
interest rates.

5. A security's duration is a measure of its price sensitivity to changes in interest rates. The longer is duration, the
greater is the relative price sensitivity.

6. Many investors do not hold securities until final maturity and they cannot invest interim coupon payments at
the yield to maturity so yield to maturity is not that meaningful a return measure. Similarly, many securities
carry embedded options, such as the borrower’s option to prepay a mortgage or the issuer’s option to call a
bond. Total return analysis is useful because it allows an investor to vary assumptions regarding cash flows and
reinvestment rates and provides a meaningful estimate of the realized return over a target holding period.

7. Interest rates on securities are quoted and calculated differently. Some instruments trade only on a discount
basis, while others are interest bearing. Some yields are quoted assuming a 360-day year, while other quoted
yields assume a 365-day year. Basic interest rate calculations must recognize these differences.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 8. Money market yields can be best compared by calculating an effective annual yield.

Teaching Suggestions

This chapter provides background information for students who are unfamiliar with basic present value or future value
concepts and the mathematics of interest rates. It can be conveniently assigned as background reading with students
required to answer the end-of-chapter questions to demonstrate proficiency.

Special attention should be paid to the four price and yield relationships which will be emphasized later in the discussion
of interest rate risk and the pricing of taxable and tax-exempt securities. Students should also be comfortable with how
Macaulay’s duration of a security without options is calculated, per Exhibit 6.6, and what this figure means in terms of
the security’s price sensitivity. In addition, it is important to note the difference between yield to maturity and total
return analysis. Comment on the fact that the yield to maturity calculation assumes that all cash flows will be received as
scheduled, will be reinvested at the yield to maturity, and that the holder of the security will hold it until final maturity.
If any of these assumptions is violated (as they always are), yield to maturity is an incorrect measure of return. For this
reason, many analysts today focus on total return as a measure of yield. Investors can vary their assumptions about the
length of holding period, reinvestment rate, and when cash flows will be generated (when embedded options will be
exercised).

Students should be familiar with how yields are quoted. Refer them to The Wall Street Journal’s daily publication of
money market yields, and ask them to compare effective yields. They should also review graphs that plot different
yields, ether from The Wall Street Journal or from Federal Reserve publications. The Wall Street Journal’s Money and
Investing Section has excellent data on the Treasury and LIBOR swap curves and corporate bond data.

Answers to End of Chapter Questions

1. $1,000 (1.02)28 = $1,741.02

Financial calculator solution
P/Y = 4
N = 28
I/Y = 8
PV =-1,000
FV = ? = 1,741.02

2. $20,000 (1.005)72 = $28,640.89

Financial calculator solution
P/Y = 12
N = 72
I/Y = 6
PV =-20,000
FV = ? = 28,640.89

3. (1.025)4 - 1 = 0. 1038, or 10.38% versus (1.00833)12 - 1 = 0. 1047 or 10.47%

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 4. Financial calculator solution
P/Y = 12
N = 24
I/Y = 12
PV =-15,000
PMT = ? = 706.10
1st payment: Interest = .0 1 (15,000) = 150.00; principal = 556. 10
2nd payment: Interest = .01 (14,443.90) = 144.44; principal = 561.66
3rd payment: Interest = .01 (13,882.24) = 138.82; principal = 567.28
4th payment: Interest = .01 (13,314.96) = 133.15; principal = 572.95

5. Present value = $6,800/(1.12)8 = $2,746.41

Financial calculator solution
P/Y = 1
N=8
I/Y = 12
FV =6,800
PV = ? = -2,746.41

6. With annual compounding: $250 (1.24)6 = $908.80;

Financial calculator solution
P/Y = 1
N=6
I/Y = 24
PV =250
FV = ? = -908.80
With monthly compounding: $250 (1.02)72 = $1,040.28
P/Y = 12
N = 72
I/Y = 24
PV =250
FV = ? = -1,040.28

7. Future value = $9,000 (1.08)3 (1.05)8 = $16,750.52

Financial calculator solution
Step 1
P/Y = 1
N=3
I/Y = 8
PV = 9,000
FV = ? = -11,337.41
Step 2
N=8
I/Y = 5
PV = 11,337.41
FV = ? = -16,750.52

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 8. Part i): Annual growth rate (g): $150,000 (1+g)5 = $250,000 or g = 0.1076 or 10.76%
Financial calculator solution
P/Y = 1
N=5
PV = -150,000
FV = 250,000
I/Y = ? = 10.76

Part ii)
Bank 1: 4.50%;
Bank 2: (1.01075)4 - 1 = 0.0437 or 4.37%;
Bank 3: (1.000112329)365 - 1 = .04185 or 4.185%

9. Financial calculator solution

P/Y = 12
N = 48
I/Y = 12
PMT =-375
PV = ? = -14,240.23
You can afford the Toyota Camry for $12,000 as the Infiniti G35 is too expensive at $16,000.

10. Premium bond because the coupon rate exceeds the market rate.
20
350 10,000
Price =  + = $10,743.87
t =1 (1.03) (1.03) 20
t

Financial calculator solution

P/Y = 2
N = 20
I/Y = 6
PMT =350
FV = 10,000
PV = ? = -10,743.87

11. Suppose that you buy the Treasury security at $10,000 par. If you strip the coupons, each equal
to $300, and the principal payment and sell them each as a zero coupon security, each would be
priced to yield the associated zero coupon rate. The price of each zero coupon security and
cumulative price would be:

6-month zero: $300/(1.027) = $292.11

1-year zero: $300/(1.029)2 = $283.32
18-month zero: $300/(1.031)3 = $273.74
2-year zero: $300/(1.034)4 = $262.45
2-year zero: $10,000/(1.034)4 = $8,748.18
Total value = $9,859.80

Thus, this series of transactions would lose $10,000 - $9,859.80 = $140.20. To make a profit, an
arbitrager could short sell the security for $10,000 and buy each of the zero coupons for
$9,859.80 (or reconstitute the security) and make a profit of $140.20.
4

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 12. Assuming that Lamar paid par for the bond, the par value is $2,800. The bond pays $98 in
semiannual interest.
19
98 2,800
Price =  + = $3,000.53
t =1 (1.03) (1.03)19
t

Financial calculator solution

P/Y = 2
N = 19
I/Y = 6
PMT = 98
FV = 2,800
PV = ? = -3,000.53

Brigg's $2,800 investment returned $3,000.55, or $200.53 more than the price, for a +7.16% over
6 months, or 14.32% annually. He did well because interest rates fell during the 6 months.

13. The current price of the bond is $10,092.93 given the coupon rate of 6.5% and the market rate of
6%. The Macaulay's duration is 3.804 semiannual periods or 1.902 years.

325 (1) + 325(2) + 325(3) + 10,325(4)

Duration = (1.03) (1.03)2 (1.03)3 (1.03)4 = 3.816 semiannual periods
10,092.93

Duration of the zero coupon bond is 4 semiannual periods or 2 years. The durations differ
because the coupon bond makes interim coupon payments while the zero coupon bond pays
the entire return at maturity.

14. The price of the investment with the cash flows discounted at 6% is $6,672.28. The duration is 3.1
years calculated as [ 1,780 + 12,594.29 + 6,336.75 ] / 6,672.28.

15. a. zero duration

b. high duration
c. low duration
d. low duration

16. Both are correct. The mathematics calculates Macaulay’s duration as the weighted average of
time until the cash flows arise, where the weights are the present value of each cash flow as a
fraction of the initial price. The duration approximation formula shows that this duration
estimate is a measure of price elasticity with respect to interest rates.

17. Assume that the purchase price of the zero is $1,000. This means that its future value at maturity
in 4 years is $1,000 (1.03)8 = $1,266.77.
Formula: Change in price = -8 [.005/(1.03) ] 1,000 = -$38.83
Bond price @ 7%: = $1,266.77 / (1.035)8 = $962.00
Change in price = -$38
Duration provides only an estimate of price changes with the nonlinear price-yield relationship.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 18. The change in price will be larger. See the basic bond pricing relationships. At a market rate of
5%, the new bond price is $1,266.77 / (1.025)8 = $1,039.70. Thus the change in price is +$39.70.
Using the elasticity formula: change in price = -8 [-.005/(1.03) ] 1,000 = +$38.83.

19. Treasury bills, repurchase agreements, commercial paper, and bankers acceptances are quoted
on a discount basis.

20. The current price is $1,000,000 - .045 (180/360) $1,000,000 = $977,500.

The bond equivalent yield is: yield = [ 1,000,000 – 977,500 ] (365/180) = .046675, or 4.6675%.
977,500

21. Large negotiable CDs, Eurodollars, and federal funds rates are calculated against par value rather
than purchase price.

22. Discount rate = [ $10,000 – $9,620 ] (360/270) = .05067, or 5.067%

$10,000
Bond equivalent yield = [ $10,000 – $9,620 ] (365/270) = 0.0534, or 5.34%.
$9,620

23. Total return: Coupon interest: 10 x $305 = $3,050

10
Interest on interest: $305 [(1.025) – 1]/0.025 - $3,050
= $3,417.03 - $3,050
= $ 367.03
Value at maturity: $10,000
Total Future Dollars: $13,417.03

Financial calculator solution

Future value of coupon payments
P/Y = 2
N = 10
I/Y = 5
PMT = 305
FV = ? = -3,417.03
Value at maturity: $10,000
Total Future Dollars: $3,417.03 + $10,000 = $13,417.03

Total Return = [$13,417.03]1/10 - 1 = 0.02983, or 2.983% semiannually

$10,000

Sell the bond after 2 years:

Coupon interest: 4 x $305 = $1,220
Interest on interest: $305 [(1.025)4 - 1]/0.025 - $1,220
= $1,226.52 - $1,220
= $ 26.52
6
305 10,000
Sale Price =  t
+ = $10,247.04
t =1 (1.026) (1.026) 6
Total Future Dollars: $11,493.56
6

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in whole or in part.
 Total Return = [$11,493.56]1/4 - 1 = 0.0354, or 3.54% semiannually or 7.08 annually
$10,000

Financial calculator solution

Future value of coupon payments
P/Y = 2
N=4
I/Y = 5
PMT = 305
FV = ? = -1,266.52

Sale Price
P/Y = 2
N=6
I/Y = 5.2
PMT = 305
FV = 10,000
PV = ? = -10,247.04
Total Future Dollars: $1,266.52 + $10,247.04 = $11,493.56

Total Return
P/Y = 2
N=4
PV = -10,000
FV = 11,493.56
I/Y = ? = 7.08

The total return is higher in the second case because the holder assumes that he/she can sell the security for a
gain after two years. This gain increases the total return versus holding the security until maturity.

24. Expected total return:

Coupon interest: $3,500 x 4 = $14,000
Interest on interest: $3,500 [ (1.04)4 - 1 ) ] - $14,000 = $862.62
0.04
10
3,500 100,000
Sale Price =  t
+ = $99,172.51
t =1 (1.036) (1.036)10
Total Future Dollars: $114,035.13

Total Return = [$114,035.13]1/4 - 1 = 0.0125, or 1.25% semiannually or 2.5% annually

$108,500
Financial calculator solution
Future value of coupon payments
P/Y = 2
N=4
I/Y = 8
PMT = 3,500
FV = ? = -14,862.62
7

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in whole or in part.
 Sale Price
P/Y = 2
N = 10
I/Y = 7.2
PMT = 3,500
FV = 100,000
PV = ? = -99,172.52
Total Future Dollars: $14,862.62 + $99,172.52 = $114,035.14

Total Return
P/Y = 2
N=4
PV = -108,500
FV = 114,035.14
I/Y = ? = 2.50

This return is low because the investor pays a premium for the security, rates are assumed to
increase after purchase, and the sale price is well below the purchase price.

25. Total return on Bondex Corp. shares (per share):

First 2 years:
Dividend income: $1 x 8 = $8
Reinvestment income: $1 [(1.015)8 - 1)] - $8 = $0.433
0.015
If you can reinvest this at 9% (2.25% quarterly) over the last 3 years, the total future value of the
first 2 years’ dividends is $8.433 (1.0225)12 = $11.014

Financial calculator solution

Future value of dividends at end of first two years
P/Y = 4
N=8
I/Y = 6
PMT = 1
FV = ? = -8.43

Future value of dividends at the end of last three years

P/Y = 4
N = 12
I/Y = 9
PV = 8.433
FV = ? = -11.014

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
 Next 3 years:
Dividend income: $1 x 12 = $12
Reinvestment income: $1 [(1.0225)12 - 1)] - $12 = $1.602
0.0225

Future value of dividends at end of last three years

P/Y = 4
N = 12
I/Y = 9
PMT = 1
FV = ? = -13.602

Sale price after 5 years: $30

Total Future Dollars: $11.014 + $13.602 + $30 = $54.616

Total Return = [54.616]1/20 - 1 = 0.039846, or 3.9846% quarterly for a total return of 15.938% annually.
25.0

Financial calculator solution

Total Return
P/Y = 4
N = 20
PV = -25
FV = 54.616
I/Y = ? = 15.938

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in whole or in part.
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 “Well, I saw the shortcake on the window, and I thought maybe it
was to be thrown away, so I picked it up. I didn’t know anybody
wanted it.”
“Well, you know now,” said Mr. Bunker grimly. “And you had better
not try any more tricks like that. Are you sure you didn’t take
anything more by mistake?”
“No, I take nothing more,” answered the boy sullenly, as he
fastened his box again, and, slinging that and his basket of wares
over his shoulder, away he walked. He was quite angry at being
caught, it appeared.
“Oh, I’m so glad I got my shortcake back!” cried Rose. “Now we
can eat it when we get back to the house.”
“Do you think it was kept clean?” asked her mother.
But they need not have worried on that score. Whatever else he
was, the peddler boy seemed clean, and he had wrapped a clean
paper about the short cake before putting it in his box. To be sure
some of the strawberries on top were crushed and a little of their red
juice had run down the sides of the cake.
“But that doesn’t matter, ’cause we got to smash it a lot more when
we eat it,” said Laddie.
Which, of course, was perfectly true.
So Rose’s shortcake came back to Farmer Joel’s and they sat
down to the table again and ate it. Dessert was a little late that
evening, but it was liked none the less.
“Busy day to-morrow, children!” said Farmer Joel, as the six little
Bunkers went up to bed.
“What doing?” asked Russ.
“Getting in the hay!” was the answer. “Those who can’t help can
ride on the hay wagon.”
There were whoops of delight from the six little Bunkers.
“Could I drive the horses?” asked Russ.
 “Well, we’ll see about that,” answered Farmer Joel slowly.
“I want to ride on the rake that makes the hay into heaps like
Eskimo houses,” announced Laddie.
“You’d better not do that,” his mother said. “You might fall off and
get raked up with the hay.”
“I’ll look after them, and so will Adam North!” chuckled Farmer
Joel. “So to bed now, all of you. Up bright and early! We must get the
hay in before it rains!”
 CHAPTER XV
AN EXCITING RIDE

Very seldom did the six little Bunkers need any one to call them to
get them out of bed. Generally they were up before any one else in
Farmer Joel’s house. The morning when the hay was to be gotten in
was no exception.
Almost as soon as Norah had the fire started and breakfast on the
way, Russ, Rose and the others were impatient to start for the hay
field.
“Why does he have to get the hay in before it rains?” asked Violet
of her father, remembering what Farmer Joel had said the night
before.
“Because rain spoils hay after it has been cut and is lying in the
field ready to be brought in,” answered Mr. Todd, who heard Vi’s
question. “Once hay is dried, it should be brought in and stored away
in the barn as soon as possible.
“After it is raked up and made into cocks, or Eskimo houses, as
Laddie calls them, if it should rain we’d have to scatter the hay all
over again to dry it out. For if it were to be put away in the haymow
when wet the hay would get mouldy and sour, and the horses would
not eat it.”
“Also if the hay gets rained on after it is cut and dried, and while it
is still scattered about the field, it must be turned over so the wet part
will dry in the hot sun before it can be hauled in. We have had
several days of hot weather and my hay is fine and dry now. That’s
why I am anxious to get it into the barn in a hurry.”
“Yes, I think we had better hurry,” said Adam North who, with a
couple of other hired men, was to help get in Farmer Joel’s hay.
“We’re likely to have thunder showers this afternoon.”
 “Then we must all move fast!” exclaimed Daddy Bunker, who liked
to work on the farm almost as much as did Adam and Mr. Todd.
The day before the hay had been raked into long rows by Adam,
who rode a large two-wheeled rake drawn by a horse. The rake had
long curved prongs, or teeth, which dragged on the ground pulling
the hay with them. When a large enough pile of hay had been
gathered, Adam would press on a spring with one foot and the teeth
of the rake would lift up over the long row of dried grass. This was
kept up until the field was filled with many rows of hay, like the waves
on the seashore.
Then men went about piling the hay into cocks, or cone-shaped
piles, which, as Laddie said, looked like the igloos of the Eskimos.
Now all that remained to be done was to load the hay on a big, broad
wagon and cart it to the barn.
Laddie was a bit disappointed because all the hay was raked up,
for he wanted to ride on the big machine which did this work. But
Farmer Joel said:
“We always have a second raking after we draw in the hay, for a
lot of fodder falls off and is scattered about. You shall ride on the
rake when we go over the field for the second time.”
So Laddie felt better, and he was as jolly as any of the six little
Bunkers when they rode out to the field on the empty wagon. Once
the field was reached there was a busy time. There was little the
children could do, for loading hay is hard work, fit only for big, strong
men.
But Russ, Rose and the others watched Adam, Farmer Joel, their
father, and the two hired men dig their shiny pitchforks deep into a
hay cock. Sometimes two men, each with a fork, would lift almost a
whole cock up on the wagon at once. When one man did it alone he
took about half the cock at a time.
As the hay was loaded on the wagon, which was fitted with a rick,
going over the wheels, the pile of dried grass on the vehicle became
higher and higher. So high it was, at last, that the men could hardly
pitch hay up on it.
 “I guess we’ll call this a load,” said Farmer Joel, as he looked up at
the sky. “The road is a bit rough and if we put on too much we’ll have
an upset. Adam, I think you’re right,” he went on. “We’ll have thunder
showers this afternoon. Have to hustle, boys, to get the hay in!”
When the horses were ready to haul the first load back to the barn,
to be stored away in the mow, the six little Bunkers were put up on
top of the load to ride.
“Oh, this is lovely!” cried Rose.
“Like being on a hundred feather beds!” added Russ.
“And you don’t feel the jounces at all!” added Laddie, for as the
wagon went over rough places in the field the children were only
gently bounced up and down, and not shaken about as they would
have been had there been no hay on the wagon.
But the rough field caused one little accident which, however,
harmed no one.
The first load of hay was almost out of the field when, as it
approached the bars, Mun Bun suddenly yelled:
“I’m slippin’! I’m slippin’!”
And Margy followed with a like cry.
“Oh, I’m fallin’ off!” she shouted.
And, surely enough, Russ and Rose also felt the top of the load of
hay beginning to slip to one side. Adam North was riding with the
children, Farmer Joel and Daddy Bunker having remained in the
field, while one hired man drove the team of horses.
“I guess they didn’t load this hay evenly,” said Adam. “Part of it is
going to slip off. But don’t be frightened, children,” he said kindly.
“You can’t get hurt falling with a load of hay.”
Just as Adam finished speaking part of the top of the load slid off
the wagon and fell into the field, and with it fell the six little Bunkers
and Adam himself.
“Oh! Oh!” screamed Margy and Mun Bun.
 “Keep still!” ordered Russ. “You won’t get hurt!”
“Look out for the pitchforks—they’re sharp!” warned Rose.
Laddie and Violet laughed with glee as they felt themselves
sliding.
Down in a heap went the hay, the six little Bunkers and Adam. The
hay was so soft it was like falling in a bed of feathers. The man
sitting in front to drive the horses did not slide off.
“All over! No damage!” cried Adam, with a laugh, as he leaped up
and picked the smallest of the little Bunkers from the pile of hay. “But
we’ll have to load the hay back on the wagon.”
This was soon done, and once more the merry party started for
the barn, which was reached without further accident.
Farmer Joel had many things on his place to save work. Among
these was a hay fork which could pick up almost half a load of hay at
once and raise it to the mow.
A hay fork, at least one kind, looks like a big letter U turned upside
down. The two arms are made of iron, and from their lower ends
prongs come out to hold the hay from slipping off the arms.
A rope, running through a pulley is fastened to the curved part of
the U, and a horse, pulling on the ground end of the rope, hoists into
the air a big mass of hay.
The wagon was driven under the high barn window and from a
beam overhead the hay fork was lowered. Adam North plunged the
two sharp arms deep into the springy, dried grass.
All but Russ had gotten down off the load of hay to wait for the ride
back to the field. But Russ remained there. He wanted to see how
the hay fork worked.
So when Adam plunged the arms into the fodder Russ was near
by. Adam pulled on the handle that shot the prongs out from the
arms to hold the hay from slipping off as the fork was raised.
Then, suddenly, Russ did a daring thing. Seeing the mass of hay
rising in the air, pulled by the horse on the ground below, the boy
made a grab for the bunch of dried grass. He caught it, clung to it
and up in the air he went, on an exciting and dangerous ride.
“Oh, look at Russ! Look at Russ!” cried Rose.
“Hi there, youngster, what are you doing?” shouted Adam.
“I—I’m getting a ride!” Russ answered. But his voice had a
frightened tone in it as he swung about and looked down below. He
began to feel dizzy.
 CHAPTER XVI
OFF ON A PICNIC

While Russ swung to and fro in the mass of hay lifted by the hay
fork and was kept over the load itself there was little danger. If he fell
he would land on the hay in the wagon.
But the hay fork had to swing to one side, when high up in the air,
so the hay could be placed in the window opening into the storage
mow. And it was this part of Russ’s ride that was dangerous.
The man on the ground, who had charge of the horse that was
hitched to the pulley rope, knew nothing of what was going on above
him, for the load of hay was so large that it hid Russ and the fork
from sight. But this man heard the shout of Adam, and he called up:
“Is anything the matter?”
“No! No!” quickly answered Adam, for he feared if the horse
stopped the shock might throw Russ from his hold. “Keep on, Jake!”
he called to the hired man. “You’ll have to hoist a boy up as well as a
fork full of hay. Hold on tight there, Russ!” Adam warned the Bunker
lad.
“I will,” Russ answered. He was beginning to wish that he had not
taken this dangerous ride. It was done on the impulse of the
moment. He had seen the mass of hay being lifted with the fork and
he felt a desire to go up with it—to get a ride in the air. So he made a
grab almost before he thought.
Up and up went the fork full of hay with Russ on it. Now he was
swung out and away from the wagon, and was directly over the bare
ground, thirty or forty feet below. In the barn window of the mow
overhead a man looked out.
“What’s this you’re sending me?” called this man to Adam.
 “It’s Russ! Grab him when he gets near enough to you,” Adam
answered.
“I will,” said the man who was “mowing away,” as the work of
storing the hay in the barn is called.
“NOW WATCH HER WHIZZ!” CRIED RUSS.
 Six Little Bunkers at Farmer Joel’s. (Page 160)

Higher and higher up went Russ, while Rose and the other little
Bunkers on the ground below gazed at him in mingled fright and
envy.
“Will he fall and be killed?” asked Vi.
“No, I guess not. Oh, no! Of course not!” exclaimed Rose.
A moment later the fork load of hay with Russ clinging to it, one
hand on the lifting rope, swung within reach of the man in the mow
window. Russ was caught, pulled inside to safety, and as he sank
down on the pile of hay within the barn the man said:
“You’d better not do that again!”
“I won’t!” promised Russ, with a little shiver of fear and excitement.
Rose and the other children breathed more easily now, and Adam
North, wiping the sweat from his forehead, murmured:
“You never know what these youngsters are going to do next!”
Back to the hay field went the empty wagon, the six little Bunkers
riding on it. The trip back was not as comfortable as the one on the
load of hay had been. For the wagon was rickety and the road was
rough and jolty. But the six little Bunkers had a jolly time, just the
same.
The men were working fast now, and Daddy Bunker was helping
them, for dark clouds in the west and distant muttering of thunder
seemed to tell of a coming storm, and Farmer Joel did not want his
hay to get wet.
Another big load was taken to the barn, no upset happening this
time. And you may be sure Adam made certain that Russ did not
cling to the hay fork.
After three loads had been put away most of the hay was in.
Scattered about the field, however, were little piles and wisps of the
fodder—perhaps half a load in all—and this must be raked up by the
big horse rake.
“Oh, may I have a ride?” cried Laddie, when he saw the machine
being brought out from a corner of the rail fence where it had been
standing.
“Yes, I’ll give you each a ride in turn,” kindly offered Adam North,
who was to drive the horse hitched to the big rake. And as Laddie
had asked first he was given the first ride, sitting on the seat beside
Adam.
The curved iron teeth of the rake gathered up a mass of hay until
they could hold no more. Then Adam “tripped” it, as the operation is
called. The teeth rose in the air and passed over the mass of hay
which was left on the ground.
Working in this way, more hay was raked up until there were
several windrows and cocks to be loaded upon the wagon. As a
special favor Russ and Rose were allowed to pitch small forkfuls of
the hay on the wagon. And when all the dried grass had been
gathered up the children piled on and rode to the barn for the last
time.
“Hurray! Hurray! Hurray for the hay!” they sang most merrily.
“And it’s a good thing we got it in to-day,” said Farmer Joel, with a
chuckle, as the last forkful was raised to the mow. “For here comes
the rain!”
And down pelted the big drops. There was not much thunder and
lightning, but the rain was very hard and the storm pelted and
rumbled all night.
“It’s a good thing I got in my hay,” said Farmer Joel, as he went to
bed that night. “Now I can sleep in peace.”
For there is nothing more worrying to a farmer than to hear it rain,
knowing it is spoiling his hay. Hay, once wet, is never quite so good
as that which has not been soaked.
Though it rained all night, the sun came out the next day, and the
six little Bunkers could play about and have fun. Russ and Laddie
were glad of the storm, for the rain had made the brook higher, and
water was now for the first time running over the little dam they had
made so their water wheel could be turned.
“She’ll splash like anything now!” cried Laddie, as he and his
brother hastened down to the brook.
The water wheel was made of some flat pieces of wood fastened
together and set in a frame work. The water, spouting over the dam,
fell on the blades of the paddle wheel and turned it. On the axle of
the wheel was a small, round pulley, and around this there was a
string, or a belt, running to a small mill that the boys had made. It
had taken them quite a while to do this.
“Now watch her whizz!” cried Russ to his brothers and sisters, who
had gathered on the bank of the brook.
The water wheel was shoved back so the overflow from the dam
would strike the paddles. Around they went, turning the pulley,
moving the string belt, and also turning the wheel of the “mill.”
“Oh, isn’t that fine!” exclaimed Rose.
“Could I have a ride on it?” Mun Bun wanted to know.
“Hardly!” laughed Russ. “If you sat on it the wheel would break.”
“And you’d get all wet!” added Rose.
The six little Bunkers had much fun that day, and more good times
were ahead of them, for that evening when they made ready for bed,
tired but happy, their mother said:
“To-morrow we are going on a picnic to the woods.”
“A really, truly picnic?” Vi wanted to know.
“Of course.”
“With things to eat?” asked Russ.
“Surely,” said his mother. “Now off to bed with you! Up early, and
we’ll have a fine picnic in the woods.”
 You may be sure that not one of the six little Bunkers overslept the
next day. Bright and early they were up, and soon they started for
the picnic grounds in the big hay wagon, on which some straw had
been scattered to make soft seats.
“I wonder if anything will happen to-day?” said Rose to Russ, as
they rode off with their lunches.
“What do you mean?” he inquired.
“I mean anything like an adventure.”
“Oh, maybe we’ll find a—snake!” and Russ laughed as he saw his
sister jump, for Rose did not like snakes.
“You’re a horrid boy!” she murmured.
But an adventure quite different from finding a snake happened to
the six little Bunkers.
 CHAPTER XVII
THE ICE CAVE

Along the road, through pleasant fields, and into the woods
rumbled the big farm hay wagon, driven by Adam North. In the
wagon sat the six little Bunkers with their father and mother and
Farmer Joel. For Farmer Joel had decided that, after the haymaking,
he was entitled to a holiday. So he stopped work and went on the
picnic with the six little Bunkers.
“How much farther is it to the picnic grounds?” asked Vi, after they
had ridden for perhaps half an hour.
“Not very far now,” answered Farmer Joel.
“Is it a nice picnic grounds?” went on the little girl who always
asked questions. “And is there——”
“Now, Vi,” interrupted her mother, “suppose you wait until we get
there and you can see what there is to see. You mustn’t tire Farmer
Joel by asking so many questions.”
“Well, I only wanted to ask just one thing more,” begged Vi.
“Go ahead. What is it?” chuckled the good-natured farmer.
“Is there a swing in the picnic woods?” asked Vi, after a moment’s
pause to decide which question was the most important.
“Well, if there isn’t we can put one up, for I brought a rope along,”
answered Adam North. He liked to see the six little Bunkers have fun
as much as the children loved to play.
“Oh, a swing! Goodie!” cried Violet.
“I want to swing in it!” exclaimed Mun Bun.
“So do I!” added Margy.
 “I can see where there’s going to be trouble, with only one swing,”
murmured Daddy Bunker, smiling at his wife.
“Oh, they can take turns,” she said.
The wagon was now going through the woods. On either side
were green trees with low-hanging branches, some of which met in
an arch overhead, drooping down so far that the children could reach
up and touch the leaves with their hands.
“Oh, it’s just lovely here,” murmured Rose, who liked beautiful
scenery.
“I see something that’s lovelier,” said Russ.
“What?” asked Rose. “I don’t see anything. You can’t get much of
a view down here under the trees, but it’s beautiful just the same.”
“Here’s the view I was looking at,” said Russ, with a laugh, and he
pointed to the piles of lunch boxes and baskets in the front part of
the hay wagon. “That’s a better view than just trees, Rose.”
“Oh, you funny boy!” she laughed. “Always thinking of something
to eat! Don’t you ever think of something else?”
“Yes, right after I’ve had something to eat I think of when it’s going
to be time to eat again,” chuckled Russ.
Deeper into the woods went the picnic wagon. The six little
Bunkers were talking and laughing among themselves, and Farmer
Joel was speaking to Mr. and Mrs. Bunker and Adam about
something that had happened in the village that day.
Suddenly there was a cry from the children, who were in the rear
of the wagon, sprawled about in the straw.
“Laddie’s gone!” exclaimed Rose.
“Did he fall out?” asked Mrs. Bunker.
“No, it looks more as if he fell up!” shouted Russ.
And that, indeed, is almost what happened. For, looking back, Mr.
and Mrs. Bunker, saw Laddie hanging by his hands to the branch of
a tree he had grasped as the wagon passed beneath it. The little
fellow was swinging over the roadway, the wagon having passed
from beneath him.
“Hold on, Laddie! I’ll come back and get you!” shouted Mr. Bunker.
“In mischief again!” murmured Russ.
“Whoa!” called Adam, bringing the horses to a halt.
“Hold on, Laddie! I’ll come and get you!” called Mr. Bunker again,
as he leaped from the hay wagon.
“I—I can’t hold on!” gasped Laddie. “My—my hands are slipping!”
The green branch was slowly bending over and Laddie’s hands
were slipping from it. Then, when he could keep his grasp no longer,
he let go, and down to the ground he fell, feet first.
Luckily Laddie was only a short distance above the ground when
he slipped from the branch, so he did not have far to fall. He was
only jarred and shaken a little bit—not hurt at all.
“Laddie, why did you do that?” his father asked him, when he had
reached the little fellow and picked him up. As Mr. Bunker carried
Laddie back to the waiting wagon Russ remarked:
“I guess he thought maybe he could pull a tree up by the roots
when he caught hold of the branch like that.”
“I did not!” exclaimed Laddie. “I just wanted to pull off a whip for
Mun Bun to play horse with. But when I got hold of the branch I
forgot to let go and it lifted me right out of the wagon.”
“It’s a mercy you weren’t hurt!” exclaimed his mother.
“I should say so!” added Farmer Joel. “It’s safer for you to think up
riddles, Laddie, than it is to do such tricks as that. Come now, sit
quietly in the wagon and think of a riddle.”
“All right,” agreed Laddie, as again he took his place in the straw
with the other little Bunkers. But he did not ask any riddles for a long
time. Perhaps he had been too startled. For surely it was rather a
startling thing to find himself dangling on a tree branch, the wagon
having gone out from under him.
 However, in about fifteen minutes more Laddie suddenly cried:
“Oh, now I know a riddle! Why is a basket——”
But before he could say any more the other children broke into
cries of:
“There’s the picnic ground! There’s the picnic ground!”
And, surely enough, they had reached the grove in the woods
where lunch was to be eaten and games played.
It was a beautiful day of sunshine, warm and pleasant. Too warm,
in fact, for Mrs. Bunker had to call to the children several times:
“Don’t run around too much and get overheated. It is very warm,
and seems to be getting warmer.”
“Yes,” agreed Farmer Joel, as he looked at the sky. “I think we’ll
have a thunder shower before the day is over.”
“We didn’t bring any umbrellas,” said Mrs. Bunker.
“If it rains very hard we can take shelter in a cave not far from here
that I know of,” said Mr. Todd.
“Oh, a cave! Where is it?” asked Russ, who was lying down in the
shade, having helped put up the swing. “Could we go and see it?” he
inquired.
“After a while, maybe,” promised Farmer Joel.
Rose helped her mother spread out the good things to eat. They
found some flat stumps which answered very well for tables, and
after Mun Bun and Margy and Laddie and Violet had swung as much
as was good for them, and when they had raced about, playing tag,
hide-and-seek, and other games, the children were tired enough to
sit down in the shade.
“We’ll eat lunch after you rest a bit,” said Mrs. Bunker.
“Ah, now comes the best part of the day!” murmured Russ.
“Silly! Always thinking of something to eat!” chided Rose. But she
smiled pleasantly at her brother.
 How good the things eaten in the picnic woods tasted! Even plain
bread and butter was almost as fine as cake, Laddie said. He was
trying to think of a riddle about this—a riddle in which he was to ask
when it was that bread and butter was as good as cake—when
suddenly there came a low rumbling sound.
“What’s that?” asked Margy.
“Thunder, I think,” was the answer.
Mun Bun, who was playing a little distance away, came running in.
“I saw it lighten,” he whispered.
“Yes, I think we’re in for a storm,” said Farmer Joel.
The thunder became louder. The sun was hidden behind dark
clouds. The picnic things were picked up. Mrs. Bunker was glad
lunch was over.
Then down pelted the rain.
“Come on!” cried Farmer Joel. “We’ll take shelter in the cave!”
He led the way along a path through the woods. The others
followed, Mr. Bunker carrying Mun Bun and Adam North catching up
Margy. The trees were so thick overhead that not much rain fell on
the picnic party.
“Here’s the cave!” cried Farmer Joel, pushing aside some bushes.
He showed a dark opening among some rocks. In they rushed, for it
was a welcome shelter from the storm.
“Oh, but how cool it is in here,” said Rose.
“Yes,” answered Farmer Joel. “This is an ice cave.”
“An ice cave!” exclaimed Russ. “Is there really ice in here in the
middle of summer?”
Before Farmer Joel could answer a terrific crash of thunder
seemed to shake the whole earth.
 CHAPTER XVIII
A BIG SPLASH

There was silence in the dark cave of ice following that big noise
from the sky. Then came a steady roar of sound.
“It’s raining cats and dogs outside,” said Farmer Joel. “We got here
just in time.”
Suddenly Margy began to whimper and then she began to cry.
“What’s the matter, my dear?” asked her mother.
“I—I don’t like it in here!” sobbed Margy.
“I—I don’t, either, an’—an’ I’m goin’ to cry, too!” snuffled Mun Bun.
“Oh, come, children!” exclaimed Mr. Bunker, with a laugh. “Don’t
be babies! Why don’t you like it in here?”
“I—I’m ’fraid maybe we’ll be struck by lightning,” whimpered
Margy.
“Oh, nonsense!” replied her mother.
“No lightning ever comes in here,” said Farmer Joel. “Why, if
lightning came in there couldn’t be any ice. The lightning would melt
the ice, and it hasn’t done that. I’ll show you a big pile of it back in
the cave. Of course no lightning ever comes in here! Don’t be afraid.”
The thunder was not so loud now, and as no lightning could be
seen because the Bunkers were far back in the dark cave, the two
smallest children stopped their crying.
“Is there really ice in here?” asked Russ.
“It feels so,” said Rose, with a little shiver.
“Yes, there’s ice here,” went on the farmer. “It comes every year,
and stays until after the Fourth of July. Come, I’ll show you.”